Macro-Economy and Micro-Poverty, Jamming, 02/06/2017

I'm pausing my look through The Federalist Papers until next week because I have a political rant to get off my chest. A few friends of mine have posted and spoken about the new minimum wage law in Ontario. I like it. They don’t. And I don’t like their reasons why.

To introduce my blatantly biased point of view – I think the reasons frequently given for opposing minimum wage hikes (and across-the-board wage increases in general) are terrible reasons. They’re ideas that come from an intellectual tradition that seeks to marginalize poor and working people.

You can probably see where I’m going with this, if you’ve been a regular reader over the last few years. But I’m going to lay it down step by step.

Basically, the argument against minimum wage hikes is that it would harm small and half-medium sized businesses. By the start of 2019, Ontario will have raised the minimum wage by about 25%, from $10-11 to $15. It’ll index itself to inflation after that.

When I want to be cool and reference popular culture from 1997,
I say we should say "All About the Bennetts."

But if a business can’t afford the extra labour costs of paying their minimum wage workers 25% more per hour, it will fold. And those businesses that don’t fold will pass the extra labour costs onto the consumer, driving inflation. So the wage hike would be useless, and the economy would be in worse shape.

What Can Break Money?

Here’s one, more macro-economic reason. Inflation isn’t only a product of individual business decisions to raise prices (though that is one significant impact). A country’s central bank exerts even greater control over inflation by controlling the money supply.

The international value and purchasing power of a currency is a complex function of how much of that currency exists. Any country needs to trade with others, but even the smallest trade imbalance creates shortages or excesses of currency in a country.

If a country imports more than it exports, then its currency is always leaving the country. To prevent domestic currency shortages, its central bank might print more currency or produce it electronically through bank transfers.

But relying solely on this would be a horrible mistake, because driving up the global supply of a currency shrinks its value for international exchange. That means more currency has to leave that country to pay for all its imports. The cycle continues.

Every now and then, a Canadian Liberal party panders for votes in a
way that actually helps people and the country as a whole. So
thanks, Kathleen Wynne, for getting at least one thing right in
nearly a decade.

Net exporters have the same kind problem. People around the world buy Canadian goods. They convert their local currency into Canadian dollars when they buy that stuff, so Canadian money shows up in exporting companies’ accounts.

That’s a really straightforward way of expanding the local supply of Canadian currency. The more Canadian companies export, the more Canadian currency is floating around Canada.

But domestic buying and selling remains about the same, while our excess is usually exported. So it’d seem we’re stuck with inflation – price increases that come from a surplus of domestic Canadian currency.

Thankfully, central banks have a more sane way to restore our currency balances – the technical term is balance of payments. They buy and sell government-issued bonds from the central banks of our importing and exporting partners.

Our trade outflow to the United States was X last month? Well, let’s buy X worth of US government bonds and call it even. Because then it’s even.

Why the Standard Anti-Raise Arguments Are Totally False

Uneven balances of payments in global trade flows are the big macro-economic causes of inflation and currency depreciation. These days, pretty much every country is linked to every other one through some kind of trading relationship.

Hungary went through some weird stuff that
illuminates some unexpected corners of our
current era. For economics as well as
terrifying racist politics.

There are more than 200 countries on Earth, and I’m even taking North Korea out of this (even though they have trade links of their own). So keeping a perfect balance is a pretty tough act. That’s a main reason why there’s always a little bit of inflation, and why currencies always fluctuate so dynamically.

Not that many people know about this complicated process, though. It’s complicated. I only really figured this out through reading economic theory and a lot of well-informed papers in respected journals, magazine, and journalistic outlets about currency stability. I will give props to Milton Friedman* for teaching me a lot about economic fundamentals.

* Lots of disagreement, but that’s coming.

But that argument against minimum wage hikes isn’t only false because of the importance of currency management policy. It’s also empirically false.

When there’s a minimum wage hike, the prices of goods never raise to match that increase exactly. A 25% minimum wage hike may be followed by an overall price rise of 5% or less.

It won't have an impact on employment either. Businesses all of a sudden won’t start firing people because their minimum pay has to increase by 25%. As long as those businesses aren’t run by such incompetents that an expense like that is a make-or-break deal.

Most empirical studies of job stability after universal minimum wage hikes show that the rising minimum has little to no effect on hiring and employment. What really matters is the difference between the average wage of everyone and the legal minimum.

The average wage in Ontario is just under $25. The minimum wage in a healthy economy should be between half and two-thirds of the average wage. 15:25 = 3/5. So the new minimum wage will be three-fifths of the overall average. Right now at $11, it’s less than half.

At less than half of the average wage, that means minimum wage workers are too poor. Even though business owners post the gigs and sign the paychecks, they aren’t the real job creators of an economy – that’s the customers. People have to inject money into businesses to generate success.

Yeah, you know I'm going to have something to say about this guy.

If people are too poor, they won’t have the money to spend in businesses. With consumer spending too low, the economy will stagnate. People need enough money to live, if a society is going to live.

Why Do People Believe This Falsehood?

I’m coming back to the Mt Pelerin network again – the network of think tanks that began at the 1955 conference of new liberal economists and politicians. Reading Friedman, as I’ve been recently, I actually do respect him. He’s a vigorous economic scientist.

His preferred solutions to the problems of inflation and imbalance of payments rub me the wrong way, but that’s only because of his ideological differences. If I could have met Milton Friedman, I think we’d have had a very enlightening conversation, even though we’d agree on very few things. He could be a conservative friend. I have those.

No, I think the real villain of this mess is Friedrich Hayek. In his The Road to Serfdom, he openly advocated that inflation be stopped at all costs. Inflation – and most dangerously, hyper-inflation – was the primary economic danger in his eyes.

That’s understandable. He’d lived in Austria during the German economic collapse of the Weimar era. But Hayek was speaking to American audiences, for whom the most relevant example of hyper-inflation wasn’t Germany under the reparations regime. No, it was Hungary at the height of the Second World War.

The need for massive military production made the Hungarian government print so much currency to finance it all, that inflation drew the pengö from a value of US$33.50 in mid-1944 to $US460,000,000,000,000,000,000,000,000,000 by mid-1946.

What's your lesson for today?

Yeah, that really happened.

So Hayek understood the kind of hyper-inflation that a mega-productive economy like the United States in the late 1940s could cause. And how fast it would go. So he was worried.

Preventing inflation isn’t a bad thing. But he advocated that large-scale wage reductions were the only route to saving a currency’s value and the stability of a nation’s economy.

Yes, you heard that right. Mass poverty as the cure to an ailing economy. Either poor people plunge into greater poverty through their currency collapsing, or they creep slowly into greater poverty by lowering wages to prevent the currency collapsing.

Hayek’s network of think tanks joined with a conservative media establishment whose power grew exponentially from 1955 to today. That relationship perpetuated the idea that the economy could only avoid disaster if the poor kept getting more and more poor.

Don’t Believe the Hype

Yeah, seriously. Don't believe the hype.